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Tapiwanashe Mangwiro

Senior Business Reporter

WITH central banks increasingly exploring central bank digital currencies (CBDCs), the Reserve Bank of Zimbabwe (RBZ) will begin selling gold-backed digital tokens early next month.

In a statement yesterday,  RBZ Governor, Dr John Mangudya, said: “Pursuant to the resolution of the Monetary Policy Committee (the MPC) on March 28, 2023 to complement the issuance of physical gold coins with gold-backed digital products, the Bank wishes to advise that it will be issuing gold-backed digital tokens with effect from May 8, 2023.”

According to Dr Mangudya, the gold-backed tokens will be fully backed by physical gold held by the central bank.

“As previously advised, the issuance of the gold-backed digital tokens is meant to expand the value-preserving instruments available in the economy and enhance divisibility of the investment instruments and widen their access and usage by the public,” he added.

Buying the tokens will protect buyers from adverse currency depreciation and inflation. Gold is a stable asset as shown by the gold coins which were introduced at US$1,823 but are now valued above US$2,000 per coin.

The gold-backed digital tokens are meant to complement the existing physical gold coins and other open market operations that the central bank uses to control liquidity and as alternative investment instruments.

Instead of chasing the US dollar on the parallel market, those looking to preserve value now have an alternative instrument that equally stores value.

Like the physical gold coins issued in 2022, the gold-backed digital coins will be issued for investment purposes with a vesting period of 180 days and redeemable in the same way. 

The tokens will also be available for sale, through banks, in both foreign currency and the Zimbabwe dollar.

However, unlike the gold coins, Dr Mangudya said banks will create dedicated or specific accounts for the holding of the gold-backed digital tokens (e-gold wallets or e-gold cards). 

Holders of physical gold coins, at their discretion, will be able to exchange or convert, through the banking system, the physical gold coins into gold-backed digital tokens.

The advantage of gold tokens over coins is that they are divisible just like one’s money in a bank account. 

According to the RBZ Governor, the gold-backed digital tokens held in either e-gold wallets or e-gold cards will be tradable and capable of facilitating Person-to-Person (P2P) and Person-to Business (P2B) transactions and settlements. 

“It, therefore, means that the gold-backed digital tokens would be used both as a means of payment and a store of value,” Dr Mangudya added.

In the same manner as the pricing model of the physical gold coins, the pricing of the gold-backed digital tokens in foreign currency shall remain informed or guided by the international gold price as determined by the London Bullion Market Association (LBMA) PM fix.

“Payment for the gold-backed digital tokens or physical gold coins in Zimbabwe dollar shall remain at the current 20 percent margin above the willing-buyer willing-seller interbank midrate,” the RBZ statement said.

 Through its Twitter handle, the Ministry of Finance and Economic Development said: “The digital tokens will improve public access and usage of value-preserving instruments in the economy being availed by the Government.”

Trigrams Investments analyst Mr Walter Mandeya the introduction of the gold backed tokens “is a step in the right direction.”

“We supported the issuance of the Gold Coins when they were introduced and we believe this development is a step in the right direction as it will allow more investors to participate in this investment class.

“However, the technology backing the tokens and the mechanics of using it really need to be understood by the market for these digital e-Gold tokens to gain wide acceptance for both “store of value” and settlement purposes,” Mr Mandeya said. 

To instil confidence in the market, Mr Mandeya said there is a need to have specific legislation through an Act of Parliament related to these Gold tokens. 

“This will ensure that the Mosi-oa-Tunya Gold Coins are able to stand shoulder to shoulder with the other sovereign coins found around the world.”

The digital tokens are intended to supplement actual currencies and reach more people, particularly low-income people who cannot purchase genuine gold coins. Many people cannot afford the smallest unit of gold coin, which costs roughly US$200.  

Both the token and the gold coin, according to the central bank, will reduce demand for foreign currency and give Zimbabweans a more stable store of value. 

When compared to gold coins, gold-backed tokens are similar in terms of backing and value. They are, however, more accessible. They are also less expensive and more easily divided than genuine coins. 

How they do it elsewhere in the world

CBDCs are closely related to stablecoins but are not the same. In order to maintain a somewhat consistent value over time, stablecoins are a specific kind of private, stabilised cryptocurrency tied to another money, financial instrument or a commodity as in the case of the RBZ. 

CBDCs are issued and run by the State, in contrast to cryptocurrencies, which are decentralised. 

Various systemic objectives, including ensuring financial inclusion, reducing fraud and money laundering, ensuring sovereign alternatives for digital payments, encouraging local payments innovation, and developing a new vehicle for monetary policy, are some of the reasons that lead to the issuing of CBDCs.

According to McKinsey Global, a fundamental decision for central banks is whether to issue a retail or wholesale CBDC and the RBZ has chosen the former.

Retail CBDCs target customers and small companies as their end users, and potential use cases include social benefit payments, bill payments at e-commerce point-of-service locations, and the facilitation of online and virtual peer-to-peer transactions for both banked and unbanked users.

Around the globe, Zimbabwe is not the only country adopting CBDCs, as the Central Bank of the Bahamas partnered with a credit card company to improve the offline payment capabilities of its recently launched CBDC, including by allowing the CBDC to be loaded onto physical cards.

In another case, the People’s Bank of China has tested different versions of the digital renminbi named the e-CNY, through wallets placed inside mobile phones or held as cards that can make payments to another mobile phone wallet in physical proximity without internet access.

The Central Bank of Uruguay in an effort to reduce the costs that come with physical cash use performed a CBDC pilot as it was estimated that these costs amount to 0,6 percent of Uruguay’s GDP.

The world views CBDCs as a closer substitute to cash and several central bank initiatives refer to retail CBDCs as a form of digital cash.